The UAE tax system is a multifaceted structure that significantly impacts the country’s financial landscape. The United Arab Emirates boasts a distinctive tax landscape characterized by its tax system. This tax structure, comprising various elements, plays a crucial role in shaping the country’s economic landscape. In this discussion, we will provide an overview of the UAE tax system, shedding light on its unique characteristics and implications for individuals, businesses, and the broader financial environment.
UAE Tax system
Goods and Services Taxes (VAT and Excise Duty) in the UAE:
In the United Arab Emirates (UAE), taxes on goods and services encompass Value Added Tax (VAT) and excise duty.
Value Added Tax (VAT):
In the UAE, the VAT rate is 5%. Nevertheless, certain items are exempt from VAT. Notably, in 2020, the UAE granted exemptions for specific personal protective equipment utilized during the COVID-19 pandemic, such as medical masks, textile masks, single-use gloves, chemical disinfectants, and antiseptics. Additionally, some goods and services are subject to a 0% VAT rate, including:
- Exports and goods and services destined for locations outside the Gulf Cooperation Council (GCC).
- International transportation services.
- Investment-grade precious metals.
- Newly constructed residential properties.
- Specific education and healthcare services
Excise Tax:
In 2017, the UAE introduced an excise tax. This tax is indirect and is imposed on products deemed detrimental to human health or the environment by the government. The items subject to this tax include:
- A 50% tax on carbonated drinks (excluding unflavored carbonated water), and it may also apply to items used in making carbonated beverages.
- A 100% tax on energy drinks containing stimulating substances like caffeine, taurine, ginseng, and guarana, and it may also apply to items used in the production of energy drinks.
- A 100% tax on tobacco and tobacco products, encompassing all items listed in Schedule 24 of the GCC Common Customs Tariff.
VAT Refunds in the UAE:
In the UAE, VAT is paid by tourists, expatriates, and residents when they make purchases. Starting in November 2018, eligible tourists gained the ability to request refunds for goods acquired with VAT, provided they meet certain conditions:
- Goods must be bought from a retailer participating in the Tax Refund for Tourists Scheme.
- The goods should not be excluded from the Refund Scheme as determined by the Federal Tax Authority.
- Tourists must have the intention of leaving the UAE within 90 days of purchase, along with the items they bought.
- Goods must be exported out of the UAE within three months of purchase.
- The entire process, from purchase to export, should adhere to the requirements and procedures set forth by the Federal Tax Authority.
Tourists can claim their VAT refunds conveniently through dedicated devices available at airports, seaports, and border crossings. These devices enable consumers to electronically submit their tax invoices for purchases from outlets registered in the Refund Scheme, along with copies of their passport and credit card.
UAE Tax System for Foreigners
The United Arab Emirates (UAE) offers a unique tax system for foreign individuals. Notably, there is no income tax applied to individuals working in the UAE, regardless of their residency status. However, individuals who are not considered tax residents of the UAE may still be liable to pay income tax in their home country, subject to their respective taxation laws.
Additionally, the UAE has entered into double tax treaties with 137 countries, which can have implications for tax obligations and benefits for individuals in international financial and employment situations. Notably, UAE residents are not taxed on international pension plans.
Furthermore, the UAE has embraced the Common Reporting Standard (CRS), a global legal standard that facilitates the Automatic Exchange of Information (AEOI) between participating countries. This framework enables the sharing of tax-related data, aiding in the investigation of tax evasion and ensuring international tax compliance.
UAE Tax System for Property and Wealth
UAE Tax System for Property and Wealth is as follows:
Capital Gains Tax:
In the UAE, capital gains tax is typically not levied, unless the gains result from the sale of a company subject to income tax or banking tax.
Transfer Tax:
A transfer tax is imposed on property transactions in the UAE, with the specific rate varying among Emirates. For instance, in Dubai, the transfer tax stands at 4%. While both the buyer and seller may be involved in the transaction, it is typically the responsibility of the buyer to cover the transfer fee.
Municipality/Rental Tax:
As mentioned earlier, the taxation of rented properties differs among the various Emirates. In Dubai, residential tenants are subject to a 5% rental tax based on their annual rent, while commercial tenants face a 10% tax. In contrast, in Abu Dhabi, UAE citizens are exempt from property taxation, but expatriates pay a 3% rental tax on their properties. Similarly, in Sharjah, all tenants, regardless of their nationality, are obligated to pay a 2% rental tax.
Stamp duty:
Stamp duty is not applicable in the United Arab Emirates.
UAE Tax System for Inheritance
The United Arab Emirates does not impose an inheritance tax. In situations where a deceased individual has not left a will, the distribution of inheritance follows Islamic Shari’a principles, without regard to the nationality of the deceased.
Company Taxes and VAT Rates in the UAE
The majority of businesses in the UAE are not subject to corporation tax. In theory, most emirates have the authority to impose a corporate tax rate of up to 55%, but this is primarily applicable to foreign oil companies and foreign bank branches.
However, as previously discussed, a new corporate tax system is set to be implemented in the UAE starting from June 1, 2023.
Excise Tax for Businesses:
Businesses are required to register for excise tax in the UAE if they are involved in the following activities:
- Importing excise goods into the UAE.
- Producing excise goods intended for consumption in the UAE.
- Storing excise goods in the UAE, under certain circumstances.
- Managing an excise warehouse or designated zone.
Businesses can complete their excise tax registration through the e-services section available on the FTA (Federal Tax Authority) website.
VAT for Businesses:
In the UAE, the standard VAT rate is 5%. Businesses are obligated to register for VAT if their taxable supplies and imports surpass AED 375,000 per annum. Alternatively, businesses with a threshold of AED 187,500 may voluntarily join the VAT register. VAT-registered businesses typically need to:
- Apply VAT to the taxable goods they sell.
- Reclaim VAT for business goods and services they purchase.
- Maintain records for government compliance.
Foreign businesses visiting the United Arab Emirates can also seek VAT cost recovery.
Federal and Regional Taxes in the UAE
Federal Tax in the UAE:
In the UAE, there is no individual income tax. Social security contributions are mandated for GCC and UAE national employees. Corporate taxes mainly impact oil companies and foreign banks, but a new federal corporate tax will apply to profitable businesses from June 2023. The UAE pursues Double Taxation Agreements and Bilateral Investments Treaties. Inheritance tax is absent, with Islamic Shari’a principles applied in the absence of a will. Various tourist facility taxes, property transfer taxes, and excise taxes further contribute to the UAE’s tax structure.
Regional Tax in the UAE:
Free Trade Zones in the UAE, numbering over 40, offer special tax and import advantages. Businesses within these zones can enjoy exemptions from corporate taxes for up to 50 years, along with full exceptions on import and export taxes.
Tourism fees vary across Emirates. In Dubai, hotels charge a Tourism Dirham Fee per room night, ranging from AED 7 to AED 20 for up to 30 nights, depending on the hotel’s grade. Abu Dhabi imposes a 4% fee on hotel bills, along with AED 15 per room per night. Ras Al Khaimah hotels also apply a tourism fee of AED 15 per room night.
Regarding rental tax, rates vary by Emirate. In Dubai, residential tenants pay 5%, while commercial tenants pay 10%. In Abu Dhabi, UAE citizens are exempt, but expatriates pay 3%. In Sharjah, all tenants face a 2% rental tax.
Read Federal and Regional Taxes in UAE in details.
UAE Tax System for Import and Export
Customs Duties: In the UAE, customs duties are typically assessed at 5% of the Cost, Insurance, and Freight (CIF) value for most items. However, there are exemptions for certain categories. Notably, alcohol is subject to a 50% customs duty, while tobacco products incur a 100% customs duty.
Furthermore, a 5% VAT is applied to gasoline in addition to customs duties.
Conclusion
In conclusion, the UAE tax system plays a pivotal role in shaping the economic landscape of the country. Understanding the intricacies of the UAE tax system is essential for individuals and businesses alike, as it directly influences financial planning, investment decisions, and overall economic activities.
Exploring the UAE tax system reveals a unique approach that distinguishes it from many other jurisdictions. With no federal income tax and a focus on indirect taxes, the UAE provides a business-friendly environment that attracts both local and international investors.
The simplicity and clarity of the UAE tax system contribute to the ease of doing business in the country. Businesses and individuals can navigate the tax landscape with confidence, thanks to the straightforward regulations and the absence of complex direct taxation.
Furthermore, the UAE tax system aligns with the government’s commitment to promoting economic growth and attracting foreign investments. The strategic implementation of taxes ensures a balance between generating revenue for public services and creating a conducive environment for businesses to thrive.
In summary, the UAE tax system is a key driver of the nation’s economic prosperity. Its simplicity, business-friendly approach, and strategic alignment with economic goals make it a cornerstone of the UAE’s success story. As we conclude our exploration, it’s evident that the UAE tax system is not just a set of regulations; it’s a catalyst for sustainable economic development and financial stability.
